Hurdles ahead in JPMorgan’s bid to form private credit syndicate

NEW YORK: JPMorgan Chase & Co is running into some pushback over fees and control as it aims to pull together a group of lenders to help fund private credit deals it originates, an effort that has the potential to reshape the burgeoning market.

The biggest US bank has held talks with several private credit firms about creating what would amount to a syndication group where members would take a slice of each loan, according to sources.

JPMorgan would select the loans, and others in the syndicate would have no or limited ability to veto deals they don’t want to fund, the source said.

Banks have been searching for the best way to carve out their own piece of the US$1.6 trillion private credit market as higher rates spark a flood of investor interest and increasingly stringent capital rules make them more wary of keeping loans on their balance sheet.

“Private credit has already been eating into Wall Street banks’ share of the leveraged loan and high-yield bond markets, a key fee generator,” said a source.

Several lenders have announced private credit partnerships, and others are looking at options.

JPMorgan is in ongoing discussions with potential partners, and in some meetings has floated charging fees that amount to about 2.5%.

The fees and lack of veto power pitched in some of the conversations have made some firms reluctant to join the effort.

A spokeswoman for JPMorgan declined to comment.

JPMorgan has been searching for third-party capital to supplement the more than US$10bil of balance sheet cash that it has already set aside for its private credit strategy, which it began rolling out in the last year, Bloomberg reported last month. In addition to alternative asset managers, it’s also pursuing discussions with sovereign wealth funds, pension funds and endowments.

The firm is one of the largest underwriters of leveraged loans and high yield bonds and the private credit effort may help it protect a crucial business.

The structure it’s pitching would allow it to maintain control of client relationships and provide a level of certainty to borrowers that agreed loans would be funded.

Private credit specialists have gathered more money to deploy based on the pitch of higher returns and lower volatility than the public loan market.

But now they face questions over how they’ll accomplish the unglamorous tasks of finding, underwriting and servicing a broader swathe of loans.

While the largest credit firms and alternative asset managers have spent years building out origination platforms, many smaller or mid-size rivals may struggle to replicate that in short order.

Some traditional banks see that as their opening to get a steady stream of fees by leaning on their underwriting and servicing experience and existing relationships. — Bloomberg